A WHOLE NEW KIND OF INCENTIVE

House Will Get Another Shot at Feed-In Tariffs
Phil Taylor, August 3, 2009 (NY Times)

SUMMARY
The newest, hottest, biggest idea in New Energy incentives in the U.S. is the Feed-in Tariff (FiT).

This might come as something of a surprise to Europeans who have been working with FiTs for most of this century. What also might come as a surprise to Europeans is that by taking up the FiT, the U.S. is returning to an incentive it invented in 1978.

Representative Jay Inslee (D-Wash) and Representative Bill Delahunt (D-Mass) are preparing a bill that would institute a national FiT. It would require regulated utilities to buy energy generated by private “distributed” systems – like rooftop solar systems and small wind turbines -- at higher than retail power rates over an extended period of time. The rate would be the cost of production plus a premium high enough to incentivize more installations and would be contracted for 15, 20 or 25 years. FiTs have been very successful at stimulating investment in Europe. Solar energy industry watchers attribute Germany’s world-leading installed solar capacity to its aggressive and carefully designed FiT.

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Advocates believe a well-designed FiT is a more effective incentive to distributed, small system New Energy development than the Renewable Electricity Standard (RES contained in legislation currently making its way through Congress. The RES has more impact on power plant-scale development. The FiT is made available to any power producer and the FiT rate is adjusted to each energy source.

The Inslee/Delahunt proposal would likely be similar to Inslee’s 2008 Renewable Energy Job and Security Act, which applied to projects of less than 20 megawatts. If so, the new FiT would be administered by the Energy Department. It would give installation owners priority access to the grid and a 20-year commitment to tailored rates, for any region of the country, guaranteeing a 10% return on investment. It would be revenue neutral because it would be paid for by small price increases to all utility ratepayers.

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Inslee learned a crucial lesson from Germany’s FiT, a lesson Spain’s 2008 misadventure with its FiT demonstrated it did not learn. He built into his proposal a digression rate. The guaranteed profit is reduced the longer the buyer waits to sign on. This drives innovation and uptake but reduces the incentive as the desired larger volumes of capacity are developed.

Opponents say the 1978 Public Utilities Regulatory Policies Act (PURPA) demonstrated the dangers of messing with utility rate structures to promote New Energy. Regulated at the level of the states, PURPA required utilities to buy electricity from “non-utility producers” at an “avoided cost” rate, the amount the utility would have paid to generate the power or purchase it. PURPA did drive the development of some New Energy but it primarily drove the development of much cheaper natural gas and cogeneration.

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The Inslee/Delahunt FiT, however is intended to build a base of distributed generation, which former CIA Director R. James Woolsey says makes it a national security issue. By diversifying and distributing U.S. power production, it makes the nation less vulnerable to disruptions from grid failures. Woolsey has said it would be hard to intentionally design a transmission system more vulnerable to accidental or intentional disruption than the current, sprawling, tangled web of lines and big power plants. Besides reducing the system’s vulnerability to terrorist targeting and accidental outages, the distributed generation that would be driven by FiTs could reduce grid congestion.

Woolsey points to the effectiveness of Germany’s incentive, describing a single building in Munich that has a bigger installed solar capacity than sun-rich Texas or sun-rich Florida. The German New Energy boom spawned by its FiTs also created 117,000 new jobs between 2004 and 2008.

A lot of people dislike the term "feed-in tariff." It works in Europe but sounds to U.S. ears like a tax. Some like the terms "advanced renewable energy payments" or "renewable buybacks." Inslee’s sticking with his FiT.

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COMMENTARY
One of the arguments used on behalf of the FiT is that it is flexible. It is applied to each New Energy and in each region so as to effectively drive innovation and large-scale uptake. By supporting all New Energies with guaranteed profitable rates, FiTs drive innovation in the direction of obtaining larger energy returned on energy invested.

Germany more than doubled its New Energy capacity between 2000 and 2007. It passed its first FiT in 1991 and its landmark Renewable Energy Sources Act in 2000 but the crucial turning point was the 2004 amendment to the Act that upped the tariffs, strengthened the digression rate and increased the nation’s goals for New Energy. The installed solar capacity went from 150 megawatts to 850 megawatts between 2003 and 2005 and Germany met its 2010 target of getting 12.5% of its power from New Energy sources in 2007-08.

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The idea of an FiT for the U.S. is growing from the grassroots in state and city governments.

Michigan state Representative Kathleen Law's (D) September 2007 "Renewable Energy Sources Act" was the first state European-style FiT. Her law was presented to the 2007 National Caucus of Environmental Legislators and inspired proposals in Illinois, Rhode Island and Indiana.

The Canadian province of Ontario was the first state-level government in North America with FiTs. Vermont adopted FiTs in May, though it was only passed into law without the Governor’s signature.

Gainesville, Fla., established the first U.S. solar-only FiT in March. It offers photovoltaic (PV) system owners 32 cents per kilowatt-hour for electricity produced over 20 years.

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Several states (Michigan, Minnesota, Indiana and California) are working different versions of FiTs at the instigation of activist advocates. (See Electricity Feed Laws, Feed-in Tariffs, Advanced Renewable Tariffs, and Renewable Energy Payments)

South Dakota's Public Utilities Commission is taking public comments on a policy to support building more wind. It would require that utilities pay “avoided costs” rates, like PURPA, but would stop short of full FiTs.

Inslee and Delahunt want a national FiT law to avoid leaving policy development to individual states. This would quell the continuing grassroots struggles as well as eliminate PURPA's pitfall.

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David Owens, vice president of business operations at the Edison Electric Institute, says the grassroots movement is the best way to go because the FiTs that emerge at state and local levels are well-suited for their localities. Gainesville’s solar-only FiT fitted the city perfectly, Owens argues, and therefore effectively created jobs and generated big new levels of solar capacity.

Owens also points out that adding a national FiT on top of the current energy and climate bill’s national RES and national cap&trade system is a little much. He asks for evolution instead of revolution.

Inslee, Delahunt and a host of activists deeply concerned about building New Energy capacity as the only effective answer to rapidly advancing global climate change might prefer a New Energy revoluton. And being able to point to a growing list of cases where the incentive has proven effective steels their determination.

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QUOTES
- Representative Jay Inslee (D-Wash): "We have some brilliant Americans with brilliant business plans with brilliant technologies, but they don't have financing…The charm of the feed-in tariff is solid, take-it-to-the-bank security and confidence for the investing community…The renewable-energy standard is good, and I'm a firm backer, but it has a weakness…It's really only an incentive for the next-closest-to-competitive technology, frankly, which is wind right now."
- Former CIA Director James Woolsey, on Germany’s FiT: "The Germans made a big and very important change…It's the reason that Germany -- a quarter of the size of the United States -- has six times as much solar."

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- Former CIA Director James Woolsey, on the U.S. transmission system: "What we have today, with extremely high-voltage transmission lines and transformers sitting out behind cyclone fences next to highways, is vulnerable to physical attack; it is vulnerable to cyber attack…"
- David Owens, vice president of business operations, Edison Electric Institute: "Thanks to PURPA, many customers were paying a higher price for electricity than what was selling on the open market…We have a range of options available to stimulate the development of renewables…But I have difficulty if we seek to take another national approach that gives me the nightmares of PURPA."

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- Vermont Governor Jim Douglas (R): "[The FiT bill fails to recognize the current viability of renewable energy in a competitive setting and will needlessly increase costs to Vermont consumers."
- Indiana state Rep. Matt Pierce (D): "The feed-in tariff has proven to be the best way to get quick movement in renewable energy development and create a lot of jobs…Indiana has been so far behind the eight ball on renewable energy…Some have absolutely no idea what I'm talking about…They hear the word 'tariff' and they think I want to tax something...Tariff equals tax or trade barrier to them."